Baby-sitting employer wants to pay under-the-table, but also claim the Child Care Credit using my SSN as a care provider... isn't this asking for trouble?
posted by DeucesHigh to Work & Money (11 answers total) 3 users marked this as a favorite
I'm asking this on behalf of my girlfriend (Ms. DeucesHigh, in a few posts).
Last year, she worked as a babysitter for a local family, watching the kids full-time over the summer, and 10 hours a week during the school year. All-told, she made about $10k in 2008 from them. They never asked for her SSN, there was never any sort of discussion of taxes, and they were not withholding income tax or paying payroll taxes. Clearly it was understood that she was being paid under-the-table, which is the way they handle things with a few other individuals who also watch their kids. (Just to note, I'm not looking for opinions on whether this was a dumb idea, or whether she should have paid her taxes or not -- that can be taken to MetaTalk).
Anyway, this spring rolls around, and her father files her tax return as he usually does; she had a W-2 from a school job, but didn't get anything from her babysitting employers (W-2 or 1099) and he didn't factor in that income.
On the 10th of April, her employers e-mail and ask for her home address and her SSN, so that they could fill out a form to get the Child and Dependent Care Credit (35% of the money they spent on child care, up to $3000 for 1 child, or $6000 for 2 or more). We weren't really considering the ramifications (and she had no reasonable way to refuse, in any case), so she gave them the information.
She sent them a follow-up e-mail asking whether it was a good idea to list them as a childcare provider, since there was no corresponding income reported for her, or expense reported for them. Her employers said that they have done it before with no problems, but that they'd look into it and ask their accountant. Nothing more was said on the matter, and we assumed they did not include her on their return. Today, though, they sent another e-mail saying that they did go ahead and list her as a childcare provider, to get the tax credit... long after it was possible for her to file an amended return to try to preempt any problems.
The Household Employer's IRS Tax Guide references the Child and Dependent Care credit, and vice versa, so it wouldn't be inconceivable to think that the two are often filed together, and probably cross-referenced pretty routinely. It seems like a no-brainer that claiming a tax credit for childcare that is not otherwise substantiated by tax returns would raise red flags for an audit (for her, or for them, or both).
It's somewhat surprising that they didn't 1099 her to leave her unfairly holding the bag for all of the taxes, since that would keep them in the clear to get their tax refund, and most people wouldn't fight it. However, it is clear that their legal responsibility was to pay payroll taxes as a Household Employer (see below). They were required to furnish a W-2 Wage and Tax Statement by Feb 1, and to submit Schedule H to report the household employment taxes.
Given all of this information, what is her best course of action?
-Ignore the situation, and hope that no one gets audited?
-File an amended tax return as though she was self-employed, and get hit with the full self-employment taxes and possible penalties?
-File an amended return as an employee, and file Form 4852 to request a W-2? (she's legally an Employee, as noted below, but she doesn't want to do this, since that gets the IRS involved automatically to hunt for the unpaid payroll taxes, and would probably irk her employers)
Thanks for any input!
From the IRS article on the Dependent Care Credit:
"If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer. If you are a household employer, you may have to withhold and pay social security and Medicare tax and pay federal unemployment tax. For information, see Publication 926, Household Employer's Tax Guide."
According to the Household Employer's Tax Guide:
"Do You Have a Household Employee?
You have a household employee if you hired someone to do household work and that worker is your employee. The worker is your employee if you can control not only what work is done, but how it is done. If the worker is your employee, it does not matter whether the work is full time or part time or that you hired the worker through an agency or from a list provided by an agency or association. It also does not matter whether you pay the worker on an hourly, daily, or weekly basis, or by the job.
Example: You pay Betty Shore to babysit your child and do light housework 4 days a week in your home. Betty follows your specific instructions about household and child care duties. You provide the household equipment and supplies that Betty needs to do her work. Betty is your household employee.
Household work. Household work is work done in or around your home. Some examples of workers who do household work are: (...Babysitters...Nannies...etc etc)
IF you ...
A-- Pay cash wages of $1,600 or more in 2008 to any one household employee.
THEN you need to...
Withhold and pay social security and Medicare taxes.
-The taxes are 15.3% of cash wages.
-Your employee's share is 7.65% (You can choose to pay it yourself and not withhold it.)
-Your share is a matching 7.65%. "